Yesterday, in part 1 of this two-part series, I discussed how choosing your local partner and your legal structure are important to consider in establishing a new international school. In today’s post, I am going to focus on the importance of choosing the right deal structure and protecting your IP.
3. Choosing the Right Deal Structure
International school deals are commonly structured in one of four ways. It is important you choose the right deal structure for your situation and goals because not all deal structures are possible or even desirable in every country. The four main deal structure types are as follows:
- Direct investment
- Co-operation agreement
- Management fees agreements
1. Direct Investment
This is the least common approach because it requires substantial capital investment and excellent knowledge of the local market, something few school investors have. A direct investment structure also requires creating and funding a large management structure to oversee the establishment and operation of the new international school. However, those who are able and permitted to structure this type of deal will have full control of the school and greater share of the revenue stream than under any alternative structure.
Under a franchise model, the newly established international school adopts the brand name and basic curriculum of the originating school and in return for this it typically pays the international school an initial upfront fee and an ongoing royalty fee, usually calculated as a percentage of the new school’s operating income or student headcount. Under a franchise model the established international school faces some risk of damage or dilution to its brand due in part to its lack of full control over the school operating under its name. However, when allowed, a franchise school tends not to require the established school to expend much time or money.
3. Co-operation Agreement
A co-operation type of deal structure is analogous to a business joint-venture (JV), however it is usually strictly regulated by the local government authority as to ownership percentages, type of school and type of student allowed. In a co-operation agreement, the local partner will usually fully finance the project while the originating school invests most of its time articulating and transferring its ethos, operational design, curriculum and business model to the new international school. The originating school recruits and trains the staff, designs the curriculum, recruits the Head of School and school management team, and advises on the design and construction of the school. Though the originating school does not totally control the new international school and must spend considerable time on the school and its relationship to its local partner, it normally receives an upfront fee and an ongoing percentage of overseas school’s income.
4. Management Fee
A management fee deal structure typically has the local partner fully financing the project and in return the originating school enters into an agreement to operate the international school on a day-to-day basis in return for a management fee. A management fee structure means the originating school will need to invest a great deal of time in establishing and operating the new international school, but this also means the originating school should have a great deal of control on how the school is run and a consistent stream of revenue, at least in theory.
Why only “in theory?” The key to successful management fee deals is getting paid. I have seen many international school companies that have done these deals not get paid either early or late in the process. This failure to pay usually occurs when the local partner claims it can no longer keep paying for one of the following reasons:
- The structure of the deal does not comply with the host country’s laws in how schools can pay overseas partners;
- The contracts do not account for which party pays the required taxes and the school does not want to pay them;
- The overseas bank account of the international school is in a country flagged by the host country’s government for money laundering or tax evasion or terrorism or really anything that makes sending money there difficult or impossible.
Of course, the local party is happy to keep the money for itself in the host country. All of these reasons could have been overcome by drafting a compliant portfolio of contracts that allowed the originating school to get paid what is owed. They key on these deals is to make sure from the very beginning that payment is possible and then to draft contracts that will ensure exactly that.
4. Protect Your School’s Intellectual Property
As is true for any company doing business overseas, it is imperative that you protect your IP. For international schools this usually means they need to register their brand name and logo as trademarks in the foreign country and this also often means they need to secure copyrights on their curricula and lesson plans. They also usually have trade secrets (teacher names, student names, and internal processes) that they need to be careful to protect as well. It is also important to realize that if you are going to license any of your IP (such as your brand name or curricula) to anyone overseas, you not only must register the IP that is tied up in those things, but you need a licensing agreement that does not inadvertently lead to you permanently relinquishing your IP to your licensee.